Not every jurisdiction has been as quick as the US to lift restrictions on short selling.
Not every jurisdiction has been as quick as the US to lift restrictions on short selling. Australia is keeping its ban on shorting of all stocks until November 19, while financial stocks are protected until January 27 next year. Meanwhile, the UK’s Financial Services Authority has declined to end its own prohibition of short selling of financials, which will now also continue into next year. That may not be an issue for activist managers such as the Children’s Investment Fund Management, which has just claimed the scalp of Deutsche Börse’s chairman for the second time in three years, although it’s unlikely to improve attitudes toward the industry in Germany at a time when Europe is considering new regulatory measures for the financial industry.
Capital requirements move up the agenda
Capital adequacy requirements is a topic that lately may have become lost amid the chaos of the financial markets, but now the Alternative Investment Management Association says the hedge fund industry needs make this a priority if managers are to come through the current turbulence intact.
Although the UK’s Financial Services Authority requires all investment firms to comply with the Internal Capital Adequacy Assessment Process for quantifying risk, Aima argues that there is greater need than ever for firms to have robust procedures in place. "The hedge fund industry has embraced the capital adequacy debate proactively and the sophisticated risk management techniques undertaken by hedge funds make this framework possible," says Aima deputy chief executive Andrew Baker.
It may now be time for the FSA to put in place more concrete and better-policed requirements. Chairman Lord Adair Turner told delegates at a recent conference: "Regulatory regimes will, I am sure, demand more capital in financial intermediation, both through higher capital requirements for banks and more effective steps to prevent highly-leveraged shadow banking entities escaping capital regimes."
But now it is time to walk the walk. The FSA has shown that it can take tough measures with its recent clampdown on short selling, whatever one thinks about the advisability or effectiveness of its approach. It’s probably time for that firmness to be directed toward ensuring that all institutions, from banks to hedge funds, have the capital they need to operate without risking disaster.
Aussie regulator hesitates to lift short-selling ban
The Australian Securities and Investments Commission yesterday extended the ban on covered short selling for non-financial stocks until November 19, but announced that its ban on shorting financial stocks would continue until January 27.
The Australian regulator first banned short selling for 30 days in September, following the example of the US, UK and several European countries, in an attempt to limit volatility from the global financial crisis.
But is the latest extension just stubbornness on the part of the regulator, unwilling to copy the Securities and Exchange Commission, which lifted the ban on short selling of financials earlier this month following the passage of the USD700bn bailout bill? The Australian arm of the Alternative Investment Management Association seems to think so.
Australian banks no longer need further government protection, says the association’s chairman Kim Ivey, arguing that the ban is damaging market liquidity and denying investors the ability to protect their capital in falling markets. "The situation has reached a stage where this extension of the short selling ban will have severe and immutable long-term effects," he says.
However, ASIC chairman Tony D’Aloisio insists that financial markets remain fragile. "We feel the reopening of covered short sales should be done in stages and in a measured way over an extended period and have regard to systemic issues, particularly for financial stocks," he says.
The regulator says it will inform the market by November 13 as to whether it still plans to lift the ban on covered short selling of non-financial stocks six days later. The hedge fund industry will certainly hope they will lift the restrictions on financial stocks at the same time.
Hedge fund activism is alive and kicking
The power of hedge fund activism should never be underestimated. After months of disputes between Deutsche Börse and two activist investors, Atticus Capital and The Children’s Investment Fund Management, on various changes sought by the hedge funds at the German stock market operator, the hedge funds have got what they wanted – partially, anyway.
On Sunday, Deutsche Börse’s supervisory board chairman Kurt Viermetz announced his intention to depart by the end of this year, ostensibly because he has reached the age of 70, even though last week he had said that he was in a "fighting mood" and would not be pushed out early.
A nominating committee is currently considering potential successors for Viermetz and is scheduled to present proposals at the company’s annual shareholders meeting in May. Atticus has said it wishes to work together with the board in finding a new chairman.
Atticus Capital and London-based TCI, Deutsche Börse’s second-largest shareholder, had earlier asked the company to hold an extraordinary shareholder meeting that would vote on ousting Viermetz.
The funds, which between them hold 19 percent of the voting rights, have also demanded changes in governance and strategy, including the sale of some business units, to boost the share price. It’s little more than three years since they engineered the departure of Viermetz’s predecessor Rolf Breuer, along with chief executive Werner Seifert, having disagreed with Deutsche Börse’s ambition to acquire the London Stock Exchange.
Viermetz is a figure of some controversy, having become the target of criticism recently following the near-collapse of Hypo Real Estate, where he was also chairman. However, his departure will be seen by the funds as a sign that they are capable of obtaining the other changes that they want.
Hedge fund sees opportunity in "new sub-prime"
As world grapples with the consequences of the implosion of the US sub-prime mortgage sector, some hedge fund managers seem to have already spotted a comparable market, following reports that funds are now turning their attention to student loans.
Jim Chanos, founder and president of Kynikos, one of the best-known short-selling US hedge funds, is reported to have student loan providers high on his list to short in the near future. "This industry has much in common with the sub-prime mortgage industry," he is quoted as saying. "Things do not look very bright."
More than two-thirds of American university students rely on loans to pay for their college education, but applications are being turned down in record numbers as the fallout in credit markets makes many types of loan impossible to write.
More than 137 lenders that participate in a US government-backed student loan programme have reportedly been forced to suspend operations in recent weeks, and another 33 firms have stopped issuing loans to students at private universities.
Analysts say that in addition to the troubled financial markets, changes in the law have also made the provision of student loans a lot less attractive to lenders. Hedge funds, now ready to resume to return to short selling with a vengeance after the ban on shorting financial stocks was lifted by the SEC, sense blood in the water.
